While many joke about that unfortunate boating accident that magically makes all bitcoin disappear, the vast majority of us know that, as the popular meme puts it, “you don’t just pay taxes. This article focuses on the U.S. tax code, as the way bitcoin is processed varies by jurisdiction. Once the IRS declared that virtual currency, such as bitcoin, would be taxed as “property” and not as currency, it became the obligation for bitcoin holders to pay taxes on everything. gain (see IRS Notice 2014-21, Guidance on Virtual Currency, March 25, 2014).
These earnings include, but are not limited to, earnings from any type of trade or sale; gains from the sale that may have been made when purchasing a good or service with Bitcoin (including these lambos); and on the fair market value of any bitcoin mined, as of the date of receipt. It goes without saying that record keeping can be especially burdensome for the unwary, inexperienced or reckless.
For people holding bitcoin for investment purposes, gains or losses resulting from a sale of bitcoin, or virtual currency, are reported on IRS Form 1040 Schedule D and IRS Form 8949 (Sales and Other Provisions fixed assets). Individuals whose bitcoin gains are held for one year or less are taxed at regular tax rates, while those who hold more than one year are subject to capital gains tax rates.
It is important to keep IRS Form 8949 in mind when tracking transactions because the IRS requires detailed information for each transaction. This includes a description of the amount and type of cryptocurrency, when it was acquired and sold, the amount of the proceeds of the sale, the cost or basis upon acquisition, and the amount of the gain or loss. Due to the IRS prohibiting the use of similar exchanges covered by section 1031 (a) for cryptocurrency transactions, taxable gains or losses must be recognized at the time any cryptocurrency is converted into another cryptocurrency – a signal that no one should ever trade their bitcoin.
For those who believe that Bitcoin’s anonymity provides sufficient coverage when moving its bitcoins from an exchange, keep in mind that there is already less privacy than you might think. Independent contractors, on-demand workers, or basically anyone who receives payment in bitcoin for goods or services over $ 600 in the course of a trade or business is already subject to reports. information to the IRS. Additionally, laws, such as the Foreign Account Tax Compliance Act (FATCA), require most foreign banking and non-banking institutions to report information about U.S. residents who maintain accounts at these institutions. In the future, bank accounts with Bitcoin transactions may gain more attention as Bitcoin becomes more widespread.
The general trend is for more regulation and scrutiny of Bitcoin transactions to identify tax liability issues. Just in April 2021, a Federal Court judge authorized the IRS to use subpoenas to obtain information on those who had more than $ 20,000 in transactions on two bitcoin exchanges.
Just as eBay and PayPal have been required for several years to report and provide a 1099k for 200 transactions and over $ 20,000 in gross sales in a calendar year, it is reasonable to expect that exchanges will eventually follow. similar reporting guidelines in the future, as federal law evolves over time. In fact, it may become the norm to declare $ 600 or more.
Overall, it’s important to be as careful and precise as possible with taxing bitcoin. While most Bitcoin HODLers will have no issues with tax reporting until nothing is done to trigger a loss or gain, those who engage in taxable events, such as these hefty arbitrage games, will be subject to it. to tax. Most transactions count as short-term capital gains that are taxed up to 37%, depending on the tax bracket. However, the best benefit of holding bitcoin for more than a year is to avoid short-term tax rates in favor of long-term appreciation rates. These long-term rates are usually between 15% and 25%, which is much lower.
Fortunately, most exchanges offer ways to download transactions, so bookkeeping is less of a headache. As always, consult with tax professionals about your obligations and follow these filing deadlines. Hopefully, as bitcoin continues to soar on the moon, the pain of paying taxes on any bitcoin income will be less painful.
This is a guest post by SJ Ware. Opinions expressed are entirely his own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.